Fin paper revised

Overview:

The following is an annual breakdown that comprises an overall economic assessment of the periods starting in the first quarter of 2013 and ending with the third quarter of 2015. Each year will highlight various trends, current events, and changes that were of particular importance to the overall performance in that given timeframe. Likewise, certain financial measures provide insight into the relationships behind each factor or element, also pointing out any information of historical influence that still has an impact on today’s market and global economy.

2013

The United States economy stumbled into the 2013 fiscal year after a less than desired and lackluster end to 2012. As such, this year-end slowdown in performance and spending did not provide the best foundation to propel the economy forward even more within the upcoming new calendar year. Growth for the United States’ Real Gross Domestic Product (GDP) was 1.5% at the end of 2013, with Q3 and Q4 being the strongest quarters, marking a much lower percentage change in economic growth than 2012’s Real GDP growth of 2.3%[footnoteRef:1]. [1: https://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&904=2013&903=1&906=a&905=2015&910=x&911=0]

When looking at the main components of Real GDP, consumer consumption saw a healthy increase during the year, increasing 1.7%. This value actually marked a much needed increase in consumption, making 2013 a well performing, but not highest, period of personal consumption expenditures since the ’08-’09 economic downturn on a percentage change basis[footnoteRef:2]. This was almost unexpected when considering the lagging growth that was assumed to follow from the final quarter of 2012. In fact, most of the consumption growth was seen during the first and last quarter of the year, as the economy was meet with various stress points in the remaining middle quarters. [2: https://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&904=2012&903=1&906=q&905=2015&910=x&911=0]

To start highlighting these stress points, we can begin to explain consumer spending and consumption based upon the measure of consumer confidence. At the start of 2013, the Conference Board reported that its measuring index for confidence was down 8.1 points to 58.6 from the prior month, the lowest reading in over a year, as well as a third straight monthly decline[footnoteRef:3]. Similarly, it was reported that jobseekers were feeling less optimistic in regarding their future job opportunities within the next six months, especially with a looming fiscal cliff to consider. With a lowering level of confidence, consumers were reluctant to increase spending activity, pulling earnings down for companies across a variety of sectors. Spending can be directly tied to how the consumer feels about the future, and the final decision of whether to spend now or save for later was clearly reflected in 2013 as a year to moderately spend (or cut back) in hopes of saving more. [3: http://www.huffingtonpost.com/2013/01/29/consumer-confidence-january_n_2573918.html]

Similarly, wage growth for 2013 is also a vital measure that is closely aligned with consumer spending and confidence. According to the U.S. Social Security department, national wage growth was around 1.28% greater in 2013 than in 2012, but much lower than historically[footnoteRef:4]. Typically, with increasing wages, consumers have more to spend and should thus consume more in the economy. However, to explain the slowdown in consumption for the middle quarters, we can look at the Cost of Living increase for 2013, which was around 1.5%[footnoteRef:5]. As you can see, wages did not increase above the Cost of Living, and thus consumers in fact did not have a real increase in disposable income but rather saw a decrease in the purchasing power from their wages. Ultimately, with lower wages not keeping up with the Cost of Living standard, as well as the decrease in consumer confidence, the stress points in mid-2013 become more clearly to grasp. [4: http://www.ssa.gov/oact/cola/AWI.html] [5: http://www.ssa.gov/oact/cola/colaseries.html]

However, it is still important to remind ourselves that consumption, as an overall part of 2013’s Real GDP, did increase. It is just that consumption in 2013 did not increase as much as it probably would have were these stress points not present. The first and last quarters were still able to offset these for an overall positive 1.7% increase for 2013’s consumption. Since consumption also makes up a majority of Real GDP for the United States, the big decline in Real GDP of about 0.7% from 2012 to 2013 is reflected, as consumption did not do as much as it was expected to do in order to really push GDP further to a healthier 2.5-2.7% range which may have been possible holding other factors constant. As mentioned, issues with a fiscal cliff and low real wage growth were among key factors bringing down GDP.

Also during the year, Congress passed new legislation increasing the payroll tax associated with the Social Security program. This was a fairly large increase, taking the value from a previous 4.2% to 6.2%[footnoteRef:6]. Both consumers and their employers felt this increase of two hundred basis points, as each side pays into this federal program. This was particularly felt by the lower and middle class, which offset any potential tax cuts that could be beneficial to them. Many industry professionals debated the exact effect this would have on GDP; however, it was unanimous that the tax increase would certainly shave off a decent amount of real growth. Likewise, consumer growth was estimated to be about 2.5% to 3%, without the tax6. Thus, we once again see the effects that are realized in the form of slower growth because of this change in tax policy. Lastly, all income levels felt these tax increase, as a higher income tax of 39.6% was added in 2013 to those in upper income brackets. As such, the payroll tax on Social Security was felt more by those consumers earning a lower income, up to the $113,700 cap as a proportion of their taxable income. [6: http://www.cnbc.com/id/100378110]

Overall, the rate of unemployment fell steadily during 2013, starting with 8.0% in January and ending at 6.7% by year-end[footnoteRef:7]. The decline was a continuous success for the economy as a whole, as it reduced adding extra pressure on an already delicate environment. While the rate was not near the acceptable 5% mark, 2013 saw fast movement in its reduction. People may have had lower consumer confidence and spending, along with low wage growth and an increase in taxes, but at least they were working. In doing so, they were at least spending a portion of income and this increase in employment did account for moving consumption forward during the year. Real GDP growth was still down in 2013 from 2012, but the reduction in unemployment prevented a more severe decline on a growth term basis. [7: http://data.bls.gov/timeseries/LNS14000000]

In addition, there were particular sectors, such as Housing, Oil, and Automotive, which influenced the economy in 2013. In terms of Housing, 2013 was a positive year for growth. There was a significant investment in home building and home renovation by consumers, as demand for such increased from the housing crisis. According to the Department for Housing and Urban Development, construction for single-family housing and multifamily units were up by 15% and 25% respectively from 2012[footnoteRef:8]. Remodeling data also showed a continued sign of improvement, with expenditures showing above 10% growth over the previous year. This can be attributed to the increasing levels of favorability between homeowners and their property values. [8: http://www.usnews.com/opinion/blogs/economic-intelligence/2014/01/21/what-will-the-housing-market-be-like-in-2014]

Many homeowners and homebuyers were starting to see signs of health in this area and their surrounding assets, making them more comfortable refinancing, remodeling, and searching or building new homes. Rising home values also continued in 2013 in a majority of real estate markets, lifting many out of underwater status from their mortgages9. In relation to spending and GDP, housing construction was estimated to add around 100,000 new jobs during 2013, also comprising about a fourth of the total net GDP growth. With more jobs, spending, and home values, the Housing sector acted as a strong foundation for many economic factors during the year9.

In a similar fashion, the economy and many domestic corporations benefited with lower cost energy in the form of an oil boom within the United States during 2013. The production of domestic oil was so great that the United States was on track to surpass other nations as the largest producer of oil within the next few following years[footnoteRef:9]. This made energy costs to domestic corporations, such as manufacturing, automotive, and airlines, much cheaper to operate and lock in low costs. In addition, oil prices rose during the later part of the year, allowing the economy to benefit from an increase in oil prices they could achieve from exportation. It has been estimated that 0.3% of GDP growth during 2013 can be linked back to the oil boom, without accounting for any multiplier effects[footnoteRef:10]. These effects consist of more stable energy, an export stimulus, and lower gas prices for consumers, increasing their discretionary income and allowing for more consumption in the economy. The importation of costly oil dropped over 70% from 2007-2013, reaching comparable levels to that of 1984,11. marking huge increases in energy independence and investment growth for harvesting and refining crude oil within the United State’s economy. [9: http://www.usnews.com/opinion/blogs/economic-intelligence/2013/12/18/us-oil-boom-is-spurring-the-economy] [10: http://americanactionforum.org/insights/oil-and-gas-production-boosts-economic-growth]

The final major economy sector worth highlighting for 2013 is the automotive industry. Another major foundation for the U.S. economy, this sector gained a huge comeback since the dreary days and lagging sales that occurred during and after the economic downturn in ‘08-‘09. In fact, every major automaker reported improved sales during 2013, with a 7.6% increase that accounted for 15.6 million vehicles, a mark unsurpassed since 2007[footnoteRef:11]. Plagued by bankruptcy and federal bailout regulation, 2013 saw the realization of all major automakers becoming profitable once again. Also, the investment and introduction of new models generated increases in consumer buying, as well as corporate spending. This was a healthy sign that both parties were finally starting to feel secure about wealth, employment, and confidence. Access to an increase in jobs should also not be overlooked in regarding this sector, as it added around 75,000 throughout the year12. A final component of this sector was the rise in car loans being offered due to pleasing interest rates, as well as banks offering up more credit as they felt comfortable about their improving risk position. With better loans and financing, this also freed up spending for other wants, such as home improvements, travel, shopping, etc. Likewise, as stated above, better home refinancing also freed up income to put into automotive spending, making this sector a very positive one throughout the year. [11: http://money.cnn.com/2014/01/03/news/companies/car-sales/]

The final area to highlight for 2013 pertains to the decisions, actions, and policies of the United States’ government, both monetary and fiscal. A unique event that occurred during the year was the federal government shutdown during October. Due to a lack of agreement between political parties regarding a spending bill with a provision for “Obamacare,” nearly 6.6 million federal workers were furloughed. Outside estimates have ranged the negative impact of the shutdown, mostly notably how it reduced GDP growth during the final quarter. The loss of growth was estimated to be 0.2% to as much as 0.6% of GDP, as well as hindering the creation of 120,000 new jobs in the private sector[footnoteRef:12]. The reason why the range can vary is due to how the modeling of GDP growth loss was calculated. Most federal spending also indirectly affects the private sector, and thus functioned as providing further economic disruption during the month. Many categories, besides federal workers were also affected, such as small business owners, agricultural workers, and those who depended on income from disability and tax-refunds13. This also affected federal payrolls and caused economic slowdown for consumers in general, as well as for business wishing to spend. It becomes clear to see how the influence of a government in a recovering economy can trickle down into the private sector and average household consumer. [12: https://www.whitehouse.gov/sites/default/files/omb/reports/impacts-and-costs-of-october-2013-federal-government-shutdown-report.pdf]

In terms of the Federal Reserve and monetary policy, 2013 was in the middle of the third and final round of the Quantitative Easing program that started back in 2008. While purchases of the Federal Reserve did not officially end until late 2014, Chairman Ben Bernanke announced scaling back asset purchases in June for the September meeting. This announcement, often referred to as the “taper tantrum,” signaled that tapering off purchases could be possible if positive economic signs of moderate inflation and low unemployment continued to align with the Federal Reserve’s target rates[footnoteRef:13]. However, because of the news, the market was quick to react to the removal of the Federal Reserve’s presence. US Treasury rates, and thus many interest rates using the Treasury as a foundation, surged as people pulled out of the bond market. Yields rose to a fifteen-month high[footnoteRef:14] as prices fell due to the increase in supply from the sell off/outflow, and the market (represented by the S&P 500 and the Dow Jones Industrial Average) dropped by around 3-5% on average in the days following the announcement[footnoteRef:15]. The program still continued to provide liquidity for 2013, and the right positive signs mentioned in detail above, such as falling unemployment, a strengthening housing market, and an increased spending, did exist for Bernanke to state a reduction in the pace of purchases for an eventual end, instead of just choking things off completely. Nonetheless, the markets signaled a different opinion and felt it was untimely, especially as higher rates could start to reduce the momentum gained in the automotive and housing sectors, as well as with the spending, wage growth and employment gains seen throughout the year. [13: http://www.economist.com/blogs/freeexchange/2013/12/federal-reserve] [14: http://www.foxbusiness.com/economy/2013/06/19/fed-decision-on-tap/] [15: http://finance.yahoo.com/q/hp?s=%5EGSPC&a=04&b=31&c=2013&d=05&e=30&f=2013&g=d]

As investors and institutions came to peace with the announcement of the reduction in the QE stimulus, Wall Street markets and stocks surged, with unprecedented returns for 2013 in over sixteen years. The 2013 bull market marked its best gains since the ’08-’09 economic turndown, with all major indices (S&P500, Dow, NASDAQ, and Russell) returning between 26.5% and 38.3%[footnoteRef:16]. This record breaking year showed signs of an improving and strong economy, as well as an economy that could support the stress points of a fiscal cliff, government shutdown, and high yields, as each of these aforementioned stresses also occurred in 2013, but rather did not prevent the strong performance in stocks. The dual improvement in housing values and stocks were vital in repairing the balance sheets for consumers. Also, the 10-year treasury yield, important for mortgages, rose to its highest of the year by 0.6 basis points, and the US Dollar strengthen as a currency against other major global currencies used for trade[footnoteRef:17]. Barring the second quarter dip of 5% around the “taper tantrum,” the market did not fall past the 5% threshold all year. 2013 was a sign that the economy was certainly improving and not just heading in the right direction. Even global stock performance in Europe and Japan saw significant high gains[footnoteRef:18], as global trade improved with investment and spending because of better domestic performance by US companies. [16: http://www.usatoday.com/story/money/markets/2013/12/31/market-year-end-high/4263237/] [17: http://www.cnbc.com/2013/12/31/us-stocks.html] [18: http://money.cnn.com/2013/12/31/investing/stocks-markets/]

Similarly, as billions flowed into the strong stock market, billions flowed out of the bond market. A record of around $72 billion flowed out of the bond market, with 10-year Treasury yields above 3% in 201319. The Barclays U.S. Aggregate Bond Index dipped during 2013, mainly a reaction to the slowdown of Federal Reserve purchases, falling just under 4% over the year[footnoteRef:19]. Another disappointing element of 2013 was the falling prices for Gold. It came as no surprise that as the Dollar increased with inflation, its main hedge, Gold, would decrease. However, prices fell a strong 28%, the first down year for Gold since 2000[footnoteRef:20]. [19: http://finance.yahoo.com/q/hp?s=LAG&a=00&b=1&c=2013&d=11&e=31&f=2013&g=w] [20: http://money.cnn.com/2013/12/19/investing/gold/?iid=EL]

2014

After coming off the strong end to 2013, many analysts, officials, and consumers were optimistic about 2014 and its potential. The increase in spending for the final quarter of 2013, along with a fantastic stock market year-end, gave expectations that more spending by consumers and businesses, along with more investment in the bull market would continue.

The economic measure of Real GDP in 2014 showed a healthy sign, with growth at 2.4% by the end of the year[footnoteRef:21]. The percentage change exceeded the lagging growth witnessed in 2013, and was the highest annual growth rate seen since coming out of the recession. This ramping up in GDP was attributable to many of the same components one would traditionally expect. [21: https://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&904=2013&903=1&906=a&905=2015&910=x&911=0]

The first of these components was once again led by an increase in consumer spending. The consumption expenditures climbed throughout the year in terms of percent growth, ending at 2.7%21. This gain was similar to GDP growth in that it was at the highest level since the recession. This is largely attributable to the fact that consumption accounted for 76.6% of 2014’s GDP in terms of its contribution and was thus a driving factor for GDP’s comeback. Another thing to note was the particularly good year the service sector saw in 2014 when compared to goods and services from the past years. Personal consumption in goods inched forward again in 2014 by 3.3% compared to 3.1% and 2.7% in 2013 and 201221. The strong end of 2013 and the continued success of the improving economy propelled this steady increase in growth in 2014. Services however, exhibited a strong increase, well above its pace over the past two years. This increase, a large proportion of the total spending done by consumers that year, represented a 2.4% increase, far exceeding growth of 1.0% and 0.8% in 2013 and 201221. Furthermore, the contribution of services, 1.09, finally accounted for more percentage change in GDP than goods did in 2014, overtaking 2014’s good contribution of 0.7521. For 2013 and 2012, goods made up the majority rather than services.

A second component, private investment, increased during the year by 5.4% as businesses started to expand more and invest in new structures and equipment21. These areas each saw double the growth in 2014 over 2013. Even other areas, such as innovation measured by intellectual property, also saw moderate positive growth within the year. More expansion and investment also stimulates other sectors of the economy, further adding jobs, increasing needs for good and services, and setting up strong foundations for future investments and growth requirements over time to meet needs. Seeing as growth for private investment in 2013 tanked by more than half of was it was in 2012, this moderate rebound was another healthy indicator for the United States recovering economy.

As spending and investment continued, consumer confidence also rose in 2014. In October, the Conference Board reported their index rose to 94.5[footnoteRef:22], a seven year high before settling at 92.6 in December for the end of the year[footnoteRef:23]. As seen in 2013, this is due to similar reasons of consumers having a favorable short term outlook on the economy and labor market. These conditions improved compared to the beginning of the year, with better job security and more income from things such as falling gas prices and better wages23. Improving home values and the unemployment reductions seen in 2013 also carried into 2014, boosting confidence. [22: http://www.bloomberg.com/news/articles/2014-10-28/october-consumer-confidence-index-rises-to-94-5-from-89] [23: http://www.reuters.com/article/2014/12/30/us-usa-economy-confidence-idUSKBN0K813320141230]

Wages in 2014 grew more than the previous year, at a rate of about 2.1%[footnoteRef:24]. However, unlike 2013, wages in this year grew at a rate that outpaced the Cost of Living, measured by the U.S. Social Security department at 1.7%[footnoteRef:25]. Thus, real wages became positive this year, at around 0.4% when adjusted. This marked a turning point of negative real wages, which were seen in the prior years of 2011, 2012, and 2013[footnoteRef:26]. Thus, as discussed above, real wages allowed for more disposable income, consumption/investment, and increased confidence. Once again, this represents another healthy trend for 2014 that shifted away from some of 2013’s stress points. [24: http://equitablegrowth.org/u-s-wage-growth-remains-sluggish-despite-employment-gains/] [25: http://www.ssa.gov/oact/cola/colaseries.html] [26: http://www.epi.org/blog/average-real-hourly-wage-growth-in-2014-was-no-better-than-2013/]

In terms of the monthly unemployment rates for 2014, similar strides were achieved in lowering the figure from its 2013 end. Starting at a rate of 6.7% in January, job outlook and hiring improved throughout the year to lower this figure to 5.6% by December’s year-end[footnoteRef:27]. Significant improvement was seen during the second and forth quarters, with a steady decline in the monthly unemployment rates for these three-month timeframes. Not surprisingly, these quarters also were the same two quarters that had the highest personal consumption for 2014’s GDP calculation. In the second and forth quarter, spending growth was 3.8% and 4.3% respectively, and a big leap in private investment was seen in 2014’s second quarter, with growth of 12.6% that outpaced a majority of other periods22. This direct relationship between the economic growth of the county and the improving conditions of consumers was very apparent in 2014. While the first quarter was very weak for the year, we see that the economy was not held down by this rough start. The increase seen in consumer spending, wealth, home values, and the improvement of both industrial and service sectors all helped the cycle of people spending more, companies doing well, payroll increasing, which causes more spending and so on. [27: http://data.bls.gov/timeseries/LNS14000000]

When looking at the Housing sector in 2014 compared to its previous year’s performance, home values continued to improve, but growth was greatly slowed. The big rebound seen in 2013 was not similarly seen in this year, with home values increasing by only 4% to 5%, as opposed to the high growth seen in October 2013 of 10.6%[footnoteRef:28]. Similarly, sales for single-family homes reached its lowest point in six months in November of 2014. While growth slowed, this increase did continue to increase confidence in selling and buying a home, as well as pulled more homeowners out from underwater status. This just meant that 2014 did not account for as much in terms of remodeling, construction, and added jobs as the 2013 rebound was able to support. While still a positive sign, the economic improvements were more attributable elsewhere. [28: http://time.com/money/3629800/housing-outlook-2015/]

The domestic production in the Oil sector was still very positive for the United States, offering growth for investment, jobs, and production for exports. In fact, production for U.S. oil was at it highest levels in 2014 in 30 years[footnoteRef:29]. However, oil prices feel sharply during 2014, most notably in the forth quarter. From a peak of around $105/barrel in June, oil prices reached a 2014 year low of less than $60/barrel by December30. The decline was mainly caused by the abundant global supply of crude oil, which far exceed the demand as production from around the world ramped up. [29: http://www.eia.gov/todayinenergy/detail.cfm?id=19451]

One sector that exceeded its performance in 2014 over 2013 was the Automotive sector. Despite huge safety recalls and regulation issues during this year, car sales exceeded their 2013 post-recession record breaking year, by selling 16.5 million new vehicles, almost a million more than the previous year[footnoteRef:30]. For comparison, the highest number on record before the recession was 16.9 million. Some of the factors that helped close this gap for 2014 included similar elements to the ones mentioned above in 2013. Lower gas prices, a strengthening economy, better wages and confidence, as well as better access to financing all helped to grow this sector. Likewise, as people earn more and are able to spend less on gas, attractiveness for trucks and SUVs increase, as consumers can afford the premium cost and the ongoing fuel expenses. [30: http://www.nytimes.com/2015/01/06/business/us-auto-sales-jump-for-2014.html?_r=0]

Monetary policy saw a significant change in the beginning of 2014, with the Federal Reserve’s decision to finally scale back and tamper its asset purchases in February, of which was announced as a possible action in 2013 by Bernanke[footnoteRef:31]. With this, significant signs of improvement with the committee’s target employment and inflation rate were realized, marking a coming end to the final round of quantitative easing. Throughout the year, this dialing back continued until a final end was announced at the end of the year in October. With this, the Federal Reserve stopped accumulating its bond purchases after holding 4.5 trillion dollars worth[footnoteRef:32]. This final end was also the beginning of the Federal Reserve to turn its attention to increasing interest rates, in the form of the Federal Funds rate. Its QE program was designed to push down long-term treasury rates, which have remained low despite economic improvement. Throughout 2014 and continuing for the foreseeable time, the Federal Reserve also announced that it would plan to keep short-term rates near zero33. Most of 2014 was an extension of 2013, as a majority of the year-end effects on the economy would be better reflected during 2015’s economic performance. While criticism surrounded many decisions, there was no significant change on the market performance surrounding the decisions to taper purchases in February and when suspending activity in October, unlike the “taper tantrum” of 2013. [31: http://www.federalreserve.gov/newsevents/press/monetary/20140129a.htm] [32: http://www.nytimes.com/2014/10/30/business/federal-reserve-janet-yellen-qe-announcement.html]

A final related event that occurred in 2014 deals with another central bank; however, it was not the Federal Reserve. In June of 2014, the European Central Bank introduced the first negative interest rate to help stimulate their economic slowdown. The rate, -0.1%, was implemented to encourage banks to lend money out to businesses, instead of holding onto the cash[footnoteRef:33]. Likewise, it cut back its benchmark interest rate from 0.25% to 0.15% in an effort to drive up cheap long term borrowing for bank loans34. This was set up so that the more banks loaned out, the cheaper the banks could borrow for themselves. However, growth for spending, investment, and exports slowed for the Eurozone. In addition, a drop in the Euro’s currency value compared to the US Dollar was at a 14-month low[footnoteRef:34]. While improvement was seen domestically in 2014, stress points for Europe, a main trading partner for the Untied States besides China, caused concern for US corporations, banks, and investors. [33: http://www.bbc.com/news/business-27717594] [34: http://www.bloomberg.com/news/articles/2014-09-04/euro-declines-to-14-month-low-after-ecb-unexpectedly-cuts-rates]

Wall Street investors in 2014 celebrated another bull year return, as the stock market continued its positive growth trend from 2013. While stocks did not rise as significantly as was seen in 2013, the DJIA, S&P500, and NASDAQ increased by 7.5%, 11.4%, and 13.4% respectively[footnoteRef:35]. For the S&P500 and NASDAQ, double-digit growth continued for the third year in a row, which started in 2012. The increase in spending and investment, along with better economic forecasts and labor outlooks, allowed corporations to see profits increase and stocks move higher as the markets and many sectors gained strength. 2014 saw the best year for falling unemployment, and inflation was not a concern as signaled by the Federal Reserve reaching its target goal to back off its program[footnoteRef:36]. Once again, with an increase in housing values, wages, and falling prices for goods that increase disposable income, a majority of these factors played out similarly in 2014 as did in 2013’s stock market environment. However, because the rebounds in many of these areas were positive, but still not as strong as in 2013, the returns seen in 2014 were also not as dramatic. [35: http://dealbook.nytimes.com/2014/12/31/bull-market-for-stocks-lasts-through-2014/] [36: http://money.cnn.com/2014/12/31/investing/stocks-market-2014-great-year/]

While many investors turned away from including bonds as part of their portfolios in 2013, the bond market environment shifted modestly in 2014. According to the Barclay’s U.S. Aggregate Bond Index, bonds earned around 6% during 2014, coming back from the loss of about 2% in the previous year. However, Treasury performance fell short of expectations. The 10-year Treasury note fell to 2.173% by year-end, marking the largest one-year drop of around 0.857 basis points the largest drop since 2011[footnoteRef:37]. This was unexpected when accounting for the Federal Reserve’s end to the quantitative easing program. Seeing as yields fall when bond prices rise, yields for 2014 were expected to increase in 2014 as prices fell with more supply, while also considering rising rates in the future. However, weak growth and lacking inflation support provided the grounds for yields to decline over the yearly timeframe38. [37: http://www.marketwatch.com/story/10-year-treasury-yields-falls-further-under-220-2014-12-31]